Top Arbitrage Funds in NSE India (2024)

In the dynamic financial landscape of 2024, Indian investors are increasingly turning towards arbitrage funds for risk-averse profits. Arbitrage funds in India offer investors a unique opportunity to profit from market inefficiencies without taking on significant risk. These funds can be an attractive investment option during periods of market volatility.

In this blog, we will explore the meaning of arbitrage funds and the best arbitrage funds in India, offering insights into their features, advantages, risks, and other tips and strategies.

Top Arbitrage Mutual Funds in India Based on 5Y CAGR

Fund Name	Fund Size (in cr)	Expense Ratio	1Y Return	3Y CAGR	5Y CAGR
Tata Arbitrage Fund	₹11,519.47	0.29	8.46%	6.55%	6.15%
Invesco India Arbitrage Fund	₹17,654.19	0.39	8.47%	6.88%	6.13%
Edelweiss Arbitrage Fund	₹11,876.18	0.39	8.48%	6.70%	6.11%
Kotak Equity Arbitrage Fund	₹47,999.69	0.43	8.61%	6.74%	6.04%
Nippon India Arbitrage Fund	₹15,616.73	0.38	8.35%	6.58%	5.96%
Axis Arbitrage Fund	₹5,605.02	0.31	8.38%	6.60%	5.93%
Aditya Birla SL Arbitrage Fund	₹12,158.36	0.29	8.39%	6.50%	5.89%
Baroda BNP Paribas Arbitrage Fund	₹1,220.15	0.38	8.50%	6.40%	5.89%
HSBC Arbitrage Fund	₹2,462.05	0.28	8.25%	6.34%	5.89%
UTI Arbitrage Fund	₹6,102.82	0.36	8.34%	6.41%	5.84%

Disclaimer: Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.

Note: The list of top arbitrage funds is from 16th August 2024, and the data is derived from Tickertape Mutual Fund Screener.

🚀 Pro Tip: You can use Tickertape’s Mutual Fund Screener to research and evaluate funds with over 50+ pre-loaded filters and parameters.

Overview of Best Arbitrage Funds in India (2024)

Tata Arbitrage Fund

Tata Arbitrage Fund Direct Growth aims to exploit arbitrage opportunities across equity and derivatives markets, ensuring minimal risk and consistent returns. Ideal for conservative investors, this fund focuses on capital preservation and seeks to offer better post-tax returns compared to traditional savings instruments, using a market-neutral strategy. The large-sized fund has an AUM of Rs. 11,519.47 cr, as of 16th August 2024. The fund’s 5-yr CAGR is 6.15%, and its 1-yr return is 8.46%.

Invesco India Arbitrage Fund

Invesco India Arbitrage Fund Direct Growth is a Hybrid Mutual Fund Scheme launched by Invesco Mutual Fund. Classified under Invesco’s Hybrid category, the AUM of the fund is Rs. 17,654.19 cr. as of 16th August 2024. The fund’s 5-yr CAGR is 6.13%, and its 1-yr return is 8.47%. Furthermore, the fund’s expense ratio is 0.39%, and its PE ratio is 34.00.

Edelweiss Arbitrage Fund

Edelweiss Arbitrage Fund Direct Growth seeks to provide capital appreciation and income by predominantly investing in arbitrage opportunities across cash and derivative segments. With a focus on low-risk and stable returns, this fund can be suitable for investors looking for short-term gains from a market-neutral strategy. As of 16th August 2024, the fund’s AUM is Rs. 11,876.18 cr. The fund’s 5-yr CAGR is 6.11%, its expense ratio is 0.39, its PE ratio is 35.87 and its 1-yr return is 8.48%.

Kotak Equity Arbitrage Fund

Kotak Equity Arbitrage Fund Direct Growth is an Arbitrage mutual fund scheme from Kotak Mahindra Mutual Fund. Part of Kotak Mahindra’s Hybrid category, this fund has an AUM of Rs. 47,999.69 cr. as of 31st May 2024. The fund has an expense ratio of 0.44%. The has a 5-yr CAGR of 6.04%, its expense ratio is 0.43, and its 1-yr return is 8.61%. 

Nippon India Arbitrage Fund

Nippon India Arbitrage Fund Direct Growth is an Arbitrage mutual fund scheme from Nippon India Mutual Fund. It falls under Nippon India’s Hybrid category, this fund has an AUM of Rs. 15,616.73 cr., as of 16th August 2024. The fund has an expense ratio of 0.38. The Nippon India Arbitrage Fund has a 5-yr CAGR of 5.96%, and it has 1-yr return of 8.35%.

Axis Arbitrage Fund

Axis Arbitrage Fund Direct Growth is an Arbitrage mutual fund scheme from Axis Mutual Fund. Positioned in Axis Mutual Funds’ Hybrid category, the AUM of this fund is Rs. 5,605.02 cr., as of 16th August 2024. The fund has an expense ratio of 0.31, which is close to what most other Arbitrage funds charge. The 5-yr CAGR is 5.93%, and its 1-yr return is 8.38%. 

Aditya Birla SL Arbitrage Fund

Aditya Birla Sun Life Arbitrage Fund is an Arbitrage mutual fund scheme from Aditya Birla Sun Life Mutual Fund. This hybrid mutual fund has an AUM of the fund is Rs. 12,158.36 cr., as of 16th August 2024. The fund has an expense ratio of 0.29, a 1-yr return of 8.39% and has a 5-yr CAGR of 5.89%. 

Baroda BNP Paribas Arbitrage Fund

Baroda BNP Paribas Arbitrage Fund is an Arbitrage mutual fund scheme from Baroda BNP Paribas Mutual Fund. Classified under the Hybrid category. The arbitrage fund has an AUM of the fund is Rs. 1,220.15 cr., as of 16th August 2024. The fund has a 5-yr CAGR of 5.89%, its 1-yr return is 8.50%, and it has an expense ratio of 0.38. 

HSBC Arbitrage Fund

HSBC Arbitrage Fund is a Hybrid Mutual Fund Scheme launched by HSBC Mutual Fund. As of 15th August 2024, the AUM of the fund is Rs. 2,462.05 cr. The fund has an expense ratio of 0.28, which is similar to what most other arbitrage funds charge. The fund’s 5-yr CAGR is 5.89%, its PE ratio is 33.33, and its 1-yr return is 8.25%.

UTI Arbitrage Fund

UTI Arbitrage Fund Direct Growth is an Arbitrage mutual fund scheme from UTI Mutual Fund. As of 16th August 2024, the AUM of the fund is Rs. 6,102.82 cr. and has an expense ratio of 0.36 which is similar to its peers. Furthermore, the fund has 1-yr return of 8.34%, and a PE ratio of 32.33. There are no exit loads for the fund if exited after 15 days, and an exit load of 0.25% for funds withdrawn within 15 days.

How to Invest in Arbitrage Mutual Funds?

Now that we have explored the arbitrage funds meaning, let’s find out how to invest in them. Investing in arbitrage mutual funds can be a straightforward process. Here’s a guide to get you started:

1. Open a demat/trading/brokerage account. Investors can open a demat account with smallcase!
2. Register online at any AMC website. 
3. Explore different arbitrage mutual funds to figure out which one suits your investment objectives. 
4. Investors can use tools like the Tickertape Mutual Fund Screener to sort through these arbitrage funds and explore their fundamentals and performance in the past. They can sort through the 200+ filters available to track fund performance. 
5. Proceed to invest by clicking on the appropriate option and specifying the amount and investment mode (SIP or Lumpsum).
6. Submit your KYC details, including your PAN number and bank details, to finalise your investment.

Note: It is important to conduct thorough research and consult a financial advisor before investing in anything. Let us now learn how arbitrage funds work.

What are Arbitrage Funds?

Arbitrage funds are mutual funds that aim to generate returns by exploiting price differences in different markets or forms of a security. They typically buy and sell arbitrage stocks and derivatives to benefit from the spread between cash and futures markets, offering low-risk returns in stable or volatile markets alike. Over a 6 to 12 month period, the returns from arbitrage funds are similar in nature to those of liquid funds. 

How Do Arbitrage Funds Work?

Arbitrage funds work by simultaneously buying and selling the same asset in different markets to capture the price differential. Here’s a simplified breakdown:

• Identifying Arbitrage Opportunities: Fund managers look for price discrepancies between the cash (spot) and futures markets of the same asset.
• Simultaneous Transactions: They buy the asset at a lower price in one market (usually the cash market) and sell it at a higher price in another market (usually the futures market).
• Locking in Profits: The difference between the buying and selling prices, minus transaction costs, represents the profit from the arbitrage opportunity.
• Investing in Debt: When arbitrage opportunities are scarce, a portion of the fund’s assets may be allocated to debt instruments to ensure steady returns.

Features of Arbitrage Mutual Funds

Arbitrage funds are hybrid mutual funds that aim to profit from the price differential between the cash and futures markets of the same asset. They are designed to exploit market inefficiencies without taking on significant market risk. Here are some key features:

• Hybrid Nature: These funds combine elements of equity and debt investments, with a significant portion of the portfolio allocated to equities to qualify for equity fund taxation.
• Equity Taxation: For tax purposes, arbitrage funds are treated as equity funds, which can offer tax advantages over pure debt funds.
• Low Risk: Compared to pure equity funds, arbitrage funds offer a lower risk profile as they aim to generate returns through arbitrage opportunities rather than market movements.
• Market Volatility Advantage: These funds tend to perform well during volatile market conditions by capitalising on the price discrepancies between the cash and futures markets.

Advantages of Investing in Arbitrage Funds

Arbitrage funds offer several advantages:

• Minimal Risk: Arbitrage funds exploit low-risk arbitrage opportunities, offering short-term returns.
• Higher Returns than Savings Accounts: These funds typically outperform savings accounts, providing stable arbitrage funds returns even during market volatility.
• Tax Advantages: Arbitrage funds are taxed as equity funds because they invest at least 65% in equities, potentially offering tax efficiency.
• Flexible Investment Options: Investors can choose to invest in a lump sum or via a systematic investment plan (SIP). Lump sum investments start at Rs. 1,000, while SIPs can begin with as little as Rs. 500, allowing gradual investment over time.

How Returns are Calculated for Arbitrage Funds?

The arbitrage fund returns are calculated based on the profits generated from exploiting price discrepancies between the cash and derivatives markets. Here’s a breakdown of how these returns are typically calculated:

• Arbitrage Opportunities: The fund manager identifies price differentials between the cash (spot) market and the futures market. For instance, if a stock is cheaper in the cash market than in the futures market, the fund will buy the stock in the cash market and simultaneously sell it in the futures market at a higher price. The trade is structured to be risk-free when the future expires, aiming for the prices in both markets to converge, locking in the difference as profit.
• Execution of Trades: The profit from each arbitrage trade depends on the successful execution of these buy and sell actions. The frequency and volume of successful trades contribute to the overall performance of the fund.
• Interest Income: Apart from arbitrage trading in India profits, arbitrage funds may also earn interest from temporary cash holdings or short-term debt securities they might invest in while waiting for arbitrage opportunities.
• Calculation of Returns:

(a) Absolute Returns: For a given period, the return is simply the change in the fund’s net asset value (NAV), adjusted for any distributions such as dividends.

(b) Annualied Returns: This is the compounded annual growth rate (CAGR) that indicates the average yearly return if the fund’s performance were smoothed out over multiple years. It provides a standardised way of comparing performance with other investment options.

• Impact of Fees and Expenses: The returns are net of management fees, operational costs, and other associated charges. These expenses reduce the gross profits from arbitrage trades.
• Market Conditions: The availability and magnitude of arbitrage opportunities can vary with market volatility. Typically, more volatile markets present more opportunities for arbitrage, potentially leading to higher returns.
• Taxation: Returns are also influenced by how they are taxed. In India, for instance, arbitrage funds are treated as equity funds for tax purposes, affecting the net returns investors receive.

By carefully managing these aspects, arbitrage funds aim to provide investors with steady, low-risk returns, especially appealing in volatile or uncertain market environments.

Who Should Invest in an Arbitrage Fund?

Arbitrage funds are suitable for:

• Risk-averse Investors: Arbitrage mutual funds can be suitable for individuals seeking equity market exposure but are uncomfortable with high volatility and risk.
• Short-term Investors: These funds are optimal for those planning to invest for a brief period, typically less than three years, due to their conservative nature.
• Tax-conscious Investors: By qualifying as equity funds for tax purposes, arbitrage mutual funds provide a more tax-efficient return compared to traditional fixed-income investments.

Risks Involved With Arbitrage Funds

While arbitrage funds are relatively low risk, they are not without their challenges:

• Interest and Credit Risks: While minimal, these risks exist because arbitrage funds invest part of their assets in short-term debt or term deposits.
• Flat Market Risks: During periods when markets are flat, arbitrage opportunities are scarce, potentially leading to lower-than-average returns.
• High Expense Ratios: The need for frequent trading in arbitrage funds can result in high expense ratios, which can impact overall returns.

Taxation on Arbitrage Funds after the Union Budget of 2024-25

The arbitrage fund taxation on capital gains from your mutual fund investments is based on their holding periods and asset allocation. A few revisions were made to the tax rates, depending on their types, in the Union Budget 2024-25. It may be important to learn about these revisions when considering arbitrage mutual funds. These arbitrage funds taxation changes include:

Equity Mutual Funds

• Short-Term Capital Gains (STCG): The gains from equity mutual funds held for less than 12 months are now taxed at 20%. This is an increase from the previous tax rate of 15%.
• Long-Term Capital Gains (LTCG): For equity mutual funds held for over a period of over 12 months, gains are classified as long-term capital gains. The new budget introduces these key changes to the LTCG:

1. Tax-Free Limit: The capital gains up to Rs. 1.25 lakh per year are tax-free. This is an increase from the previous limit of Rs. 1 lakh.
2. Tax Rate: The gains exceeding Rs. 1.25 lakh are now taxed at a flat rate of 12.5%. This is an increase from the previous rate of 10%.
3. Indexation: The benefit of indexation, which allowed investors to adjust the purchase price for inflation, has been removed for all asset classes, including equity mutual funds.

Indexation was a method that allowed investors to adjust the purchase price of assets for inflation. This adjustment reduced taxable profits when selling assets like property or gold. Previously, these long-term capital gains were taxed at 20%. The new rule imposes a flat 12.5% tax on all long-term capital gains but eliminates any indexation benefits.

Capital Gains Tax	Holding Period	Old Rate	New Rate
Short-Term Capital Gains (STCG)	Less than 12 months	15%	20%
Long-Term Capital Gains (LTCG)	More than 12 months	10%	12.50%

Debt Mutual Funds

• Short-Term Capital Gains (STCG): If you sell your debt fund units within a period of 36 months, the gains are classified as short-term capital gains. The STCG will be taxed according to your income tax slab rate.
• Long-Term Capital Gains (LTCG): For debt funds held for a period over 36 months, the gains are classified as long-term capital gains. The new budget outlines a few changes on the LTCG for debt funds, including:

1. Tax Rate: A flat 12.5% tax rate applies to these gains.
2. No Indexation Benefit: The previous benefit of adjusting the purchase price for inflation is removed. Now, the entire gain after three years is taxable at 12.5%.

• Change in Holding Period for Specified Mutual Funds: Previously, debt mutual funds with a holding period of over 36 months were taxed based on the investor’s tax slab, classified as Long-Term Capital Gains (LTCG). Now, for specified mutual funds where over 65% of the investment is in debt, the holding period for taxation has been reduced to over 24 months. These funds will still be taxed according to the investor’s tax slab as either LTCG or STCG. 

Capital Gains Tax	Holding Period	Old Rate	New Rate
Short-Term Capital Gains (STCG)	Less than 36 months	Taxed according to your income tax slab	Taxed according to your income tax slab
Long-Term Capital Gains (LTCG)	More than 36 months	10%	12.50%

Hybrid Mutual Funds

Short-Term Capital Gains (STCG)

The tax on short-term capital gains depends on the fund’s asset allocation when it comes to hybrid mutual funds. Here is a breakdown of STCG tax rates according to their asset allocation in hybrid funds:

• Equity-Oriented Hybrid Funds (more than 65% in equity): The gains from units sold within 12 months are taxed at 20%.
• Debt-Oriented Hybrid Funds (less than 65% in equity): The gains from units sold within three years are taxed according to your income tax slab.

Long-Term Capital Gains (LTCG)

The capital gains tax on hybrid mutual funds that extend the specified period (12 or 36 months) is known as the long-term capital gain tax. The tax treatment under this condition is as follows:

• Equity-Oriented Hybrid Funds: The gains from units held for over a period of 12 months are taxed at 12.5%. The gains up to Rs. 1.25 lakh are tax-free.
• Debt-Oriented Hybrid Funds: The gains from units held for over a period of 36 months are taxed at 12.5% without indexation benefits. This means the entire gain is taxed at this rate, without adjustment for inflation.

Type of Hybrid  Fund	Short-Term Capital Gains (STCG)	Long-Term Capital Gains (LTCG)	Indexation Benefit
Equity-Oriented Hybrid Funds	20% for holdings less than 1 year	12.5% for holdings over 1 year, with gains up to Rs. 1.25 lakh tax-free	Not available
Debt-Oriented Hybrid Funds	Taxed as per income tax slab for holdings less than 3 years	12.5% for holdings over 3 years	Not available

Note: Mutual fund schemes where neither the equity nor debt orientation exceeds 65% will now be classified as long-term investments after 24 months. The previous holding period for these funds was 36 months. These will be taxed at the revised LTCG tax rate of 12.5%.

Factors to Consider Before Investing in Arbitrage Funds in India

When considering investing in arbitrage mutual funds, keep these factors in mind:

• Returns: Arbitrage mutual funds offer moderate returns as they mix equity and debt fund characteristics. They’re suitable for those familiar with market volatility.
• Investment Tenure: Given that these funds often have exit loads, they are best for investors who can commit for at least 3-6 months.
• Financial Goals: These funds are well-suited for short to medium-term goals. They can be used to park surplus funds, like building an emergency fund, while earning better returns than a traditional savings account.

To Wrap it Up…

Arbitrage funds are an investment option for those looking to balance risk with returns, particularly in unpredictable markets. They provide a distinctive strategy that enhances a diversified investment portfolio. With their mix of low-risk opportunities and potential for steady returns, arbitrage funds are appealing, especially in volatile conditions. Nonetheless, investors need to thoroughly evaluate their risk appetite, investment objectives, and the market environment before making an investment decision.

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Frequently Asked Questions (FAQs) on Arbitrage Funds